Rental Property Trust Account: What are they? And how can they be managed?
Trust funds are an essential aspect of managing real estate, as they help to build trust and transparency between landlords and tenants. By understanding the different types of trust funds and how they work in real estate, property managers and landlords can ensure they are following the law and providing a safe and reliable experience for their tenants.
June 15, 2023
Olivia
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Trust funds are essential to managing real estate finances, as they help build trust and transparency between real estate investors, landlords, guests, and tenants. Property managers and landlords can ensure they follow the law and provide their tenants a safe and reliable experience by understanding the different types of trust funds and how they work in real estate.
Have you ever heard of a rental trust account?
If you rent or manage properties for a living, the answer is yes. But despite its prevalence in real estate, trust accounts are often misunderstood.
In simple terms, a trust account is a type of bank account that holds money that belongs to someone else - it is often held for their benefit by another person, often an attorney. While there are many different types of trust accounts, rental trust accounts play an essential role in the financial and property management side of rental properties.
But what exactly are they? And what types of trust funds are available in real estate?
This article will dive deeper into these questions and help you better understand how they can streamline your renting process. Let's get started!
What Is a Rental Trust Account?
A rental trust account is an account that rental owners or property managers use to keep assets or hold money that has yet to be dispersed or allocated. These funds can include security deposits, rental payments, and other business funds associated with leasing.
By law, any money belonging to a tenant that the landlord holds must be kept in a separate bank account from their personal funds and identified as a trust fund. This ensures trust-related funds are secure and not mixed with the client's funds or other monies from other investment properties or projects.
Landlords generally maintain rental trust accounts. They can be any kind of non-interest-bearing accounts, such as checking accounts, savings accounts, money market accounts, etc. The property management company is responsible for maintaining accurate records of all deposits and withdrawals in a rental trust account. Hence, they comply with all applicable laws and regulations and provide transparency to their asset owners.
Benefits of Using a Rental Trust Account
As a rental owner or property manager, a rental trust account can help you keep your business finances organized. By placing your tenants’ rent payments into a trust account, you can better track and manage incoming payments. Plus, it gives you peace of mind knowing that the funds are securely held in an account with strict controls.
Other benefits of using a rental trust account include:
- Time Savings: All rental income can be deposited into a trust account, making tracking and managing payments easier.
- Security: Trust accounts are subject to stringent auditing regulations that provide added security for your funds.
- Transparency: Trust accounts have detailed reporting capabilities so you can easily view activity within the account and have confidence that deposits are being handled responsibly.
Types of Trust Accounts in Real Estate
A rental trust account is a financial vehicle that allows rental owners and property managers to hold funds on behalf of their tenants or other third parties.
There are three common types of trust accounts in real estate. Each property management trust account serves the same purpose but has different capacities and is used for different situations.
- Security Deposit Funds: These are set up at the beginning of the tenancy agreement and security deposits are collected from the tenants for future use in repairs or unfulfilled rent payments.
- Pet Funds: This type of trust account is used when tenants can keep pets on the property with permission from the owner or property management company. The funds can be used for pet-related repairs, cleaning, and other applicable fees.
- Escrow Funds: These funds typically involve third parties such as attorneys and agents managing funds on behalf of both parties until an agreement is reached or fulfilled between seller/buyer, tenant/owner, etc.
Trust accounts provide an efficient and secure way to manage money and ownership interests while ensuring compliance with state laws and regulations related to tenant security deposits, pet funds, estate taxes, and escrow payments, making them an excellent choice for asset protection for rental owners and property managers.
Common Rules for Handling Rental Trust Accounts
As a rental property owner or property manager, it’s essential to understand the standard rules and regulations for handling rental trust accounts. For example, you must:
- Collect all tenant security deposits in the trust account (separate from operating accounts)
- Keep accurate records and receipts of all transactions involving the trust account
- Hold the security deposits “in trust”— i.e., as an obligation to which you may not legally have any claim
- Return any remaining deposit funds to tenants within the time frame prescribed by state law
You should also remember that while some states require landlords to maintain two or separate trust accounts for each tenant, others allow landlords to maintain a single trust account for all tenants. To help ensure you get the most out of your trust accounting setup, many rental owners and property managers use specialized property management financial software such as Clearing, which helps automate the financial management of trust accounting.
How to Set Up a Rental Trust Account
Setting up a rental trust account can be essential to managing a rental property. But what exactly is a rental property trust account? And how do you set one up?
A rental trust account is a bank account specifically used to both collect rent and hold the rent payments of your tenants. This money is held “in trust” on behalf of the tenant to avoid tax implications and provide protection against any potential misused funds (especially if the tenant decides to take legal action).
Creating a rental trust account is relatively simple. Here's what you need to know:
- Decide which type of account works best for you— generally, checking or savings.
- Research local banks that offer rental trust accounts, as not all do.
- Speak with a banker and open an account with your chosen bank - make the required minimum deposit (if applicable).
- Request a void check for your new account so you can always access the account information.
- Give your tenants your new bank information so they can make payments directly into your trust account
- Ensure to keep excellent records; track all deposits, withdrawals, balances, and other activities to remain compliant with federal law, state regulations, and tax legislation related to tenancy payments.
- Last, double-check that state-specific rules are followed about payment collection (for example, landlords must provide tenants with written receipts in some states whenever they make payments).
Opening a rental trust account may seem daunting, but it’s not difficult once you understand how it works. Follow these steps, and work with professionals to ensure you get the most out of your rental property trust account setup and workflow.
How to Manage Your Rental Trust Account
When managing your rental trust account, having a clear process is essential. As a rental owner or property manager, it's important to know the trust funds you should be setting up, how to monitor your accounts, and what to do when there are issues.
Here are some tips on how to effectively manage personal assets in a separate account from your rental trust account:
Know the Types of Funds in Rental Operations
There are multiple types of funds used in real estate rentals, these include client funds such as pet deposits, security deposits, rent payments, insurance premiums, operating expenses, and so on... Knowing these different types of funds is essential to understanding which ones must be managed in your rental trust account.
Monitor Your Accounts Regularly
Make sure to check in with your accounts regularly—you should keep an eye on all transactions going in and out of the account. This way, you can make sure everything is accurate and accounted for.
Follow All Laws
You must ensure you’re following all laws concerning using rental trust accounts. For example, each state's specific laws vary regarding when and how any remaining funds must be returned once a tenancy ends. Ensure you investigate and keep up with changes that might occur over time since regulations can change regularly.
Managing rental trust accounts can feel overwhelming if you don't have a system. But by following these tips and understanding the different types of funds used in real estate rentals, you can ensure your accounts remain organized and effective!
Important Considerations When Setting Up a Rental Trust Account
Some important considerations must be remembered when setting up a rental trust account. First and foremost, you could establish the account in the name of the original owner of your rental business or property, not your name. Setting up the account in this way will provide maximum liability protection.
It's also essential to choose a bank or fintech partner that provides features and services specifically catering to landlords, like a streamlined bookkeeping process, an automatic payment feature, and customer service dedicated to helping property owners manage their accounts.
You should also ensure that the banking institution you choose is FDIC-insured and offers online services such as bill payments and mobile deposits. This will help ensure you have the most efficient and secure system for tracking rental payments, tax information, or other transactions associated with owning rental properties.
Finally, comparing different types of available trust funds is helpful before committing to one specific fund. Many banks offer various types of funds based on their risk level—some may be more liquid than others, while some can offer higher returns but involve more risk. You'll want to select a fund that best meets your needs over the long term.
A rental trust account is an excellent way for owners and property managers to organize and secure their finances. From housing deposits and payments to collecting rent, a rental trust account is an invaluable tool that is designed to keep track of your rental transactions in a streamlined and secure manner.
To learn more about trust accounting, and how it can help your Short-Term Rental business, connect with us for a free demo today!
Clearing is a Financial Technology Company, not a bank. Deposit Accounts are issued by Evolve Bank & Trust, Member FDIC. All company names are trademarks or registered trademarks of their respective holders. Use of them does not imply any affiliation with or endorsement by them.
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